EUR/CHF still clinging to 1.2000

May 31, 2012 — Mitul Kotecha

The job of the Swiss National Bank has become increasingly tougher over recent weeks. Speculation of a Greek exit or ‘Grexit’ and continued flight of capital from Greece as well as other peripheral countries mean that there is more prospect of upside for the CHF than downside versus EUR. The EUR/CHF 1.2000 floor has not deterred investors from parking such capital in CHF, much to the chagrin of the SNB, which has even warned about implementing capital restrictions.

Elevated risk aversion means that inflows of capital to Switzerland from the Eurozone periphery will persist. As a result, EUR/CHF looks set to trade around the 1.2000 floor for some time to come, with the risk that the SNB increasingly has to buy EUR to protect the floor. My forecasts reflect the view that any CHF weakness versus EUR will be extremely gradual in the months ahead as I expect any improvement in risk appetite to be similarly slow.

On the economic front the arguments for CHF weakness have actually lessened. Consumer confidence increased to its highest in a year in April. More importantly from the point of view of the SNB, Switzerland has registered positive CPI readings on a monthly basis for the past three months. Unfortunately, CPI is still negative on an annual basis, meaning that deflationary concerns continue to persist. On balance, the SNB’s fears over deflation will eventually lessen, suggesting in turn that worries about CHF strength will also be pared back.

Although the CHF has remained strong against the EUR it has weakened against the USD, but this is attributable to EUR weakness (due to the EUR/CHF floor) rather than inherent CHF weakness.
It will not be a one-way bet lower against the USD for both the EUR and CHF. The speculative market is highly short both currencies and they could rally in the event of any good news from Greece or the Eurozone. The CHF may also find itself weakening against the EUR if the news is sufficiently good to help stem outflows of capital from Greece and other parts of the Eurozone, but I believe this is unlikely. For the next few weeks at least, ahead of Greek elections, EUR/CHF is set to continue to cling to the 1.2000 floor, with the market set to test the SNB’s resolve.

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Calm start to the week

May 28, 2012 — Mitul Kotecha

There will be some relief reverberating through markets at the news this weekend that Greek opinion polls show growing support for pro-bailout parties. While the Greek election is still some weeks off suggesting that uncertainty will not ease quickly this news will allay fears of a quick ‘Grexit”. The week will begin quietly, with holidays in the US, keeping market trading largely thin and within ranges.

However, there are plenty of data releases and events which will result in increased nervousness as the week goes on. Data this week will reveal further contrasts between the US and Eurozone, with sentiment gauges in the latter set to deteriorate further while consumer confidence in the former will improve. In turn, Eurozone asset underperformance including EUR weakness will remain in place.

The contrast in the outlook for the US and Eurozone has been reflected in a significant shift in speculative positioning. CFTC IMM data reveals an all time high in speculative US positioning but in contrast an all time low in EUR positioning. The USD is winning by being a less ugly currency than the EUR and for now the markets are content to ignore US problems. This is set to continue over coming weeks.

Key data and events this week include the Irish referendum on the fiscal pact on Thursday and the US May jobs report on Friday. Ahead of these there is some periphery supply, with Italy coming to the primary market today. Polls point to a ‘yes’ vote in the Irish referendum, perhaps unsurprising given the risks of losing access to funding if voters vote ‘no’.

In the US markets look for a 150k increase in payrolls though its worth noting that there are less clues this month given the early release date. This slow but steady improvement in jobs will not be particularly exciting but at the same time it will no do the USD much damage either.

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GBP vulnerable, AUD downside limited

May 22, 2012 — Mitul Kotecha

Finally after weeks of selling, risk assets perked up helped by China’s pledge to focus more on supporting growth and signs of cooperation between Germany and France, as leaders of both countries agreed to do ‘everything necessary’ to ensure Greece stays in the Eurozone.

Just what this will entail is not clear but reports suggest that European officials are formulating plans ahead of the EU Summit on Wednesday. Markets are by no means out of the woods and much uncertainty will remain ahead of Greece’s election in just less than a month.

GBP has dropped both against the USD and EUR. The currency has not been helped by some dovish tones from Bank of England MPC member Posen who last week suggested that his decision to withdraw his vote for more quantitative easing may have been ‘premature’. The renewed spectre of more QE will likely weigh on GBP over coming weeks.

The fact that the market has got itself very long GBP may also have contributed to some profit taking as some caution in being excessively long GBP sets in. UK inflation data today will likely play negatively for GBP too given the sharp slowdown expected to be registered in the April CPI inflation data.

My quantitative model for EUR/GBP reflects the potential risks to GBP over coming days, with the model output suggesting further downside risks to GBP. Technical resistance will likely be seen around the 0.8198 level.

AUD’s slide has been pretty dramatic over recent weeks. Despite a bounce overnight the currency has lost close to 9% of its value against the USD since the beginning of March, weighed down by rising risk aversion and China growth worries.

My quantitative model has been persistently calling for a drop in the AUD (a fact that I have highlighted previously). Interestingly the model now shows that the gap between the current level of AUD/USD and its short term ‘fair value’ estimate has almost closed, suggesting that the downside for the currency will be limited to around the 0.96-0.97 region.

The only caveat is that a stark deterioration in risk appetite from current levels would result in a sharper fall but for now we believe that a lot of the expected downward correction in the currency has already occurred. While I would not go and rush out to buy AUD just yet, taking a short position looks much less attractive.

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